Mahler v. Szucs - Brief of Respondent

This case presents the peculiar situation in which an insured--Mahler--settled with the underlying tortfeasor--Szucs--and tried to share the recovery with the subrogated insurer--State Farm. State Farm declined to accept any part of the recovery, instead pursuing an entirely new and independent claim in a different forum against the tortfeasor's insurer, who had already settled and obtained a release and a hold harmless from Mahler.

State Farm seeks to use this circuitous and duplicative litigation for one reason only--State Farm wants to avoid its equitable and contractual obligation to bear a proportionate share of the attorney fees incurred by Mahler in recovering from the underlying tortfeasor. Well-established principles of equity and the insurance contract itself require State Farm to pay its proportionate share of the expenses its insured incurred in obtaining this recovery.

1. Can State Farm's insurance policy alter the well-established equitable principle of subrogation that a subrogor who shares in the subrogee's recovery from the underlying obligor must share in the cost of recovery, including attorney fees?

2. Where the subrogee has paid only part of a loss, can the subrogee independently pursue its subrogation claim against the third party if the subrogor decides to pursue the claim?

3. Can the insurer/subrogee recover its subrogated interest from the underlying tortfeasor after the insured/subrogor has recovered both the subrogated portion of the claim and the non-subrogated portion of the claim?

4. Is State Farm limited to recouping its subrogated interest from Mahler's recovery from the underlying tortfeasor? If so, is State Farm contractually obligated to share in the cost of obtaining that recovery?

5. Did Mahler's attorney charge a reasonable fee for all of his efforts in collecting both the subrogated and non-subrogated portions of Mahler's claim?

6. Was Mahler entitled to an award of attorney fees under Olympic Steamship where State Farm disputed a specific aspect of its coverage--the obligation to contribute to attorney fees--as opposed to the amount of the fees?

7. Is Mahler entitled to attorney fees under MAR 7.3 for successfully defending a mandatory arbitration award?

8. Was Mahler entitled to prejudgment interest where State Farm's dispute deprived Mahler of the use of the funds?

RCW 48.22.085 requires companies selling automobile liability insurance to offer to the insured Personal Injury Protection coverage. The policy must include PIP coverage unless the insured rejects it in writing. PIP benefits almost never fully compensate the insured for all damages caused by an accident, and indeed are not intended to do so. The minimum required PIP benefits are capped by specific limits:

RCW 48.22.095. Medical and income continuation benefits can be increased to a maximum of $35,000 each. RCW 48.22.100.

PIP benefits altogether fail to compensate for non-economic losses such as loss of enjoyment of life or pain and suffering. Mrs. Mahler, for example, suffered "significant pain" and a "complex of pain symptoms caused by the accident", CP 239, none of which was compensated by PIP benefits. PIP benefits will not compensate for long-term medical treatment lasting more than three years from the date of the accident, or exceeding the modest statutory limits. PIP benefits will never fully compensate for wage loss, since they are limited to 85% of wages for a maximum of $200 per week.

PIP benefits also undercompensate the insured when the PIP insurer refuses to pay full medical expenses, as State Farm did in this case. State Farm discontinued Mrs. Mahler's medical expenses after payment of $4173.32 in medical expenses. CP 41, 222. Despite this premature discontinuation of payments, Mrs. Mahler continued treatment, incurring a total of $8680 in medical expenses by the time of her settlement with the underlying tortfeasor. CP 239.

The discrepancy between PIP benefits and actual damages in this case became clear when Mrs. Mahler, who had collected just over $4000 from State Farm in PIP benefits, settled with the underlying tortfeasor for $24,250. CP 248.

State Farm repeatedly extolls the inter-insurer arbitration process as an expeditious and inexpensive remedy. BA 2-3, 5. It is also an incomplete remedy. The insured, who has not been fully compensated by PIP benefits, cannot recover the damages not provided through PIP coverage. State Farm's inter-insurer arbitration agreement is limited to "those subrogation claims created by a Voluntary Personal Injury Protection Endorsement . . ." CP 340.

Inter-insurer arbitration could never afford complete relief to a PIP insured for several reasons. First, neither the insured nor the defendant/tortfeasor has ever agreed to arbitration instead of a constitutionally guaranteed jury trial. Second, non-lawyers present claims in the arbitration, CP 351, and could never represent the interests of the PIP insured or of the third-party tortfeasor. Third, inter-insurer arbitration is not an impartial forum to which an injured person would agree. Only insurance company employees serve as arbitrators and the companies themselves hand-pick their own employees eligible to serve as arbitrators. CP 347.

Inter-insurer arbitration can also encourage the insurer to minimize or limit the insured's PIP benefits. The insurer that anticipates seeking recovery of subrogated PIP benefits from another insurer knows that it will be easier to persuade a panel of insurance company employees that its PIP benefits were reasonable and necessary if the PIP insurer has taken a hard line and limited the insured's PIP claim. That is exactly what happened here: State Farm required Mrs. Mahler to submit to an examination by a doctor whose sole practice consists in examining persons for insurance companies in order to deny further benefits to the insured. CP 439. State Farm then refused to pay further PIP benefits, which wreaked havoc in Mahler's claim against the underlying tortfeasor. CP 440.

Mrs. Mahler filed this action for damages on February 24, 1994. CP 1. Mahler sought to recover past and future medical expenses. CP 2. She did not disclaim any right to recover the damages which had already been paid by State Farm under the PIP clause.

The underlying tortfeasor, George Szucs, answered and denied any negligence. CP 6. Szucs did not plead the inter-insurer arbitration agreement. Szucs did not seek to compel arbitration. Indeed, he could not have done so, because neither he nor Mrs. Mahler were parties to the inter-insurer arbitration agreement. He did not claim that State Farm should have been added as a real party in interest to prosecute its subrogation claim. Nor did he waive any right to assert res judicata as a defense to any future action which might claim part of Mahler's damages, such as the damages paid under the PIP claim.

Mahler's attorney, Bill Bailey, wrote to State Farm and acknowledged State Farm's lien for PIP benefits. CP 206. He did not ask to represent State Farm. State Farm replied that it would seek inter-insurer arbitration and told Bailey not to recover "State Farm's claim against the adverse party or insurance company." CP 208. State Farm did not explain how State Farm--as opposed to Mahler herself--had any claim against the adverse party or his insurer.

State Farm wrote to Szucs's insurer and informed it of State Farm's subrogated interest in Mahler's claim. CP 39. State Farm did not demand arbitration. CP 39. State Farm did nothing further until Mahler's attorney settled the case against Szucs.

Fourteen months after commencing the lawsuit, Mahler and Szucs mediated the claim. Szucs presented a typical defense to an automobile accident--it was mostly the plaintiff's fault and it didn't hurt her anyway:

CP 244. Nonetheless, Szucs agreed to settle for $24,250, in return for an agreement to release "George G. Szucs and American States corporations, from any and all claims, demands, rights, actions or causes of action on account of or in any way growing out of any and all personal injuries" and "to indemnify and save harmless the said above-named releasees and said persons, firms or corporations above referred to" from all claims growing out of the accident. CP 248. Mahler's attorney deposited into trust a sum equal to State Farm's entire lien. CP 257.

Immediately after the mediation, Mahler's attorney advised State Farm of the settlement and informed it that "State Farm is obligated to reimburse Ms. Mahler reasonable attorney's fees out of your subrogation interest." CP 259. State Farm refused in no uncertain terms, rhetorically concluding, "we will not accept having your services unilaterally forced upon us for a fee that we have not agreed to." CP 262.

After the settlement, State Farm finally demanded arbitration with Szucs's insurer. CP 296. Szucs's insurer responded that it had settled with State Farm's insured:

CP 427. State Farm acknowledged in response that Mahler had settled with Szucs's insurer and "received the Applicant's subrogated interest." CP 425. But State Farm demanded that the arbitration proceed. CP 425.

Mahler's attorney Bill Bailey sought and obtained an injunction against State Farm's proceeding to arbitration for 90 days while the parties litigated in Superior Court State Farm's obligation to contribute to Mahler's attorney fees. CP 145-46. As soon as the injunction expired, State Farm immediately proceeded with the inter-insurer arbitration. CP 294. Neither State Farm nor Szucs's insurer informed Bailey, who was out of town due to his father's death right at the time the injunction expired. CP 442. Szucs's insurer presented no opposition to the inter-insurer arbitration, CP 442, and the panel found in favor of State Farm. CP 272.

Meanwhile, the Superior Court MAR arbitration was also held in early December 1995. The arbitrator found that the inter-insurer arbitration was a rubber stamp of the settlement and ruled that State Farm must share in Mahler's attorney fees. CP 442. State Farm requested a trial de novo. CP 195. State Farm and Mahler filed cross-motions for summary judgment. Judge Richard Eadie granted Mahler's motion and denied State Farm's:

CP 671. The court also awarded Olympic Steamship fees because "State Farm's actions required the Mahlers to litigate with their insurance company to get the benefits of the insurance contract . . ." CP 671.

State Farm cannot win this appeal for either of two independent reasons, either of which is sufficient to affirm the trial court's decision. First, subrogation is an inherently equitable doctrine, and State Farm cannot alter by its insurance policy the equitable requirement that it share in the attorney fees. Second, now that Mahler has recovered both the subrogated and non-subrogated portions of her claim against Szucs, the subrogated portion of the claim is no longer "recoverable" from Szucs and State Farm's own policy requires it to pay a share of the fees. Finally, Mahler's fees were both reasonable and necessary and the trial court properly granted summary judgment.

An insurer which pays all or part of the damages for an accident to its insured is subrogated, either as a matter of law or contract, to any recovery received by the insured/subrogor from the primary obligee--the underlying tortfeasor. Almost every American jurisdiction that has considered the issue has held that an insurer/subrogee must share in the cost of recovering the primary obligation--the underlying tort claim--when an insured/subrogor recovers by judgment or settlement from the tortfeasor. Two Nebraska cases are most frequently cited and almost always followed. Krause v. State Farm Mutual Automobile Ins. Co., 184 Neb. 588, 169 N.W.2d 601 (1969); United Services Automobile Ass'n v. Hills, 172 Neb. 128, 109 N.W.2d 174, 2 A.L.R.3d 1422 (1961). Other states that have followed this principle by court decision include Alabama, Arkansas, Delaware, Florida, Idaho, Illinois, Iowa, Louisiana, Minnesota, Montana, New Jersey, New Mexico, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, West Virginia, and Wisconsin. When the Kansas Supreme Court reached the opposite conclusion, the Kansas legislature passed a statute requiring the insurer/subrogee to share in the insured's fees. Bardwell v. Kester, 15 Kan. App. 2d 679, 815 P.2d 120 (1991). Indiana has a similar statute. Indiana Union Mut. Ins. Group v. Smith, 656 N.E.2d 538 (Ind.App. 1995). Our own Court of Appeals has similarly recognized the equitable right of the insured to a proportionate contribution by the insurer to the fees incurred by the insured. Fisher v. Aldi Tire, Inc., 78 Wn. App. 902, 902 P.2d 166 (1995), review denied 128 Wn.2d 1025 (1996); Desmond v. Liberty Northwest Ins., 63 Wn. App. 81, 817 P.2d 872 (1991); Richter, Wimb. & Erics. v. Honore, 29 Wn. App. 507, 628 P.2d 1311 (1980); Pena v. Thorington, 23 Wn. App. 277, 281, 595 P.2d 61, review denied, 92 Wn.2d 1019 (1979).

The reasoning of the out-of-state courts is instructive. The Nebraska Supreme Court proceeded on a trust theory, observing that the insured has only one cause of action against the tortfeasor, and cannot split that claim. Krause, 169 N.W.2d at 603. Accordingly, the insured is entitled to collect the entire claim, but must account for any surplus recovery after the insured has recovered his own loss, less any reasonable expenses incurred in the recovery:

Other courts have justified the equitable obligation of the insurer/subrogee to pay a share of attorney fees under the common fund doctrine. For example, the New Mexico Supreme Court reasoned:

Amica Mutual Ins. Co. v. Maloney, supra, 903 P.2d at 839-40, quoting 8A John A. Appleman & Jean Appleman, Insurance Law and Practice e 4903.85 (1981).

The Louisiana Supreme Court reached the same result by holding that when the insurer pays part of the losses arising out of an accident, the insurer and the insured become co-owners of the claim. Barreca v. Cobb, supra, 668 So.2d at 1129. Reasoning that a co-owner may force other co-owners to contribute to the cost and maintenance of the commonly owned property, the Court concluded that the expenses of prosecuting the jointly owned claim must be jointly paid: "As co-owners, both the insured and the insurer are responsible for the corresponding litigation expenses." Id.

The Tenth Circuit analogized this situation to worker's compensation third party actions and held that the Oklahoma Supreme Court would require the insurer to pay a proportionate amount of the insured's attorney fees. Phillips v. State Farm, supra, 73 F.3d at 1538. Similarly, the Washington Legislature has decreed that attorney fees incurred in obtaining a third party recovery for a worker "shall be paid proportionately by the injured worker or beneficiary and the department and/or self-insurer . . ." RCW 51.24.060(1)(a). Just as the Tenth Circuit discerned that the worker's compensation statutes demonstrated that sharing of attorney fees is "consistent with the overall public policy of Oklahoma in this area of law", 73 F.3d at 1539, so this Court should hold that RCW 51.24.060 incorporates a strong public policy that a subrogee must fairly and equitably share in the expense of recovering from the third party tortfeasor.

The Supreme Courts of Wisconsin and New Mexico, in common with many other courts, held that the insurer/subrogor can avoid paying a share of attorney fees only by retaining its own counsel to join in the insured's action and assist in recovering from the tortfeasor. But the New Mexico Court cautioned that the insurer must actively participate in obtaining the entire recovery, not just the subrogated portion, in order to claim that it assisted. 903 P.2d at 840.

Under these authorities, State Farm would be obligated to share in the Mahler's legal expenses in obtaining the settlement for the subrogated share of the claim against Dr. Szucs. In fact, State Farm's policy recognizes that it is obligated to share in these expenses "if the insured recovers from the party at fault and we share in the recovery . . ." CP 281.

State Farm argues that it is not subject to normal principles of equitable subrogation because its insurance policy establishes a mechanism for privately adjudicating the liability of Dr. Szucs after Dr. Szucs has already settled with the Mahlers. The Court should reject State Farm's attempt to alter basic equitable principles of subrogation through its after-the-fact private arbitration mechanism. Subrogation is fundamentally an equitable remedy and private parties cannot contract to avoid the application of equitable principles to the subrogation mechanism. Castleman Const. Co. v. Pennington, 222 Tenn. 82, 432 S.W.2d 669, 676 (1968)("Although the authorities cited in the complainants' brief would indicate that a few jurisdictions might decide otherwise, we are of the opinion that the better rule is that regardless of the source of the right of subrogation, the right will only be enforced in favor of a meritorious claim and after a balancing of the equities."); Martin v. Hickenlooper, 90 Utah 150, 59 P.2d 1139, 1143 (1936)("[E]ven when there is an agreement to subrogate, the so-called right of subrogation is not one inherent in the contract, but arises in equity and can therefore be withheld or applied as in equity seems meet according to sound judicial discretion, which is another way of saying, according to the dictates of justice."). See also R. Anderson, Couch on Insurance Law e 61.20 at p. 98 (2d Ed. 1981); Subrogation, 73 Am.Jur. 2d e 9 (1974).

Specific cases illustrate the rule. Thus, in Allstate Ins. Co. v. Clarke, 364 Pa.Super. 196, 527 A.2d 1021, 1027 (1987), the Pennsylvania court held that the insurer/subrogee could not rely on a provision in the insurance policy (never quoted in the opinion) to collect its subrogated interest before the insured/subrogor had settled with all tortfeasors, and that the insurer/subrogee would have to pay an equitable share of the insured's attorney fees, even though the insurer had told the insured's attorney not to represent their subrogated interest. Similarly, the Texas Court of Civil Appeals held that an insurer's subrogation interest is subject to equitable balancing even when the policy provides to the contrary:

Esparza v. Scott and White Health Plan, 909 S.W.2d 548, 551-52 (Tex.Civ.App. 1995).

The same equitable principle should control this case. State Farm confirmed its right to subrogation by including a subrogation clause in its policy. But State Farm cannot alter basic equitable principles of subrogation through boilerplate provisions in its policy, especially when the policy would result in the creation of a completely duplicative after-the-fact private arbitration mechanism.

The Court of Appeals erroneously held in Fisher v. Aldi Tire, Inc., supra, that an insurance company can supplant fundamental equitable principles through language in its policy:

78 Wn.App. at 908-09. The Court of Appeals failed to recognize that its leading authority, Am.Jur.2d, states exactly the opposite rule in the very next section. None of the cited Washington authorities supports the Fisher court's decision. Kish does not even deal with subrogation. Touchet simply holds that parties contracting at arms length can agree to waive subrogation rights, but does not address the amount of any subrogation recovery. Nor does Pena hold that the parties can waive equitable principles. Finally, the Court of Appeals misplaced its reliance on Thiringer v. American Motors Ins., 91 Wn.2d 215, 588 P.2d 191 (1978), when it suggested that the Thiringer court "applied equitable principles only after not finding anything in language of policy to indicate parties had agreed a different principle would apply." Thiringer impliedly reaches the conclusion that different policy language would not make any difference to its result, observing that the rule contended for by the insurer, even if included in the policy, "would be obviously unfair", and concluding that subrogation is governed by equitable principles instead of policy language:

This Court should definitively scotch the noxious doctrine that insurers can claim subrogation rights and then insert in their non-negotiated policies inequitable principles of computing the recovery available in subrogation cases. The "freedom of contract" argued by State Farm is completely unilateral; State Farm can devise whatever policy terms it wishes and a customer can take it or leave it. This Court has recognized that insurance contracts differ substantially from other commercial contracts because of the recognized "disparity of bargaining power between an insurance company and its policyholder." McGreevy v. Oregon Mut. Ins. Co., 128 Wn.2d 26, 35, 904 P.2d 731 (1995), quoting Olympic S.S. Co. v. Centennial Ins. Co., 117 Wn.2d 37, 52, 811 P.2d 673 (1991). The Court observed in McGreevy, "In our judgment, this disparity is at its greatest when an insurance company presents a current or prospective insured with a standardized, or 'form' document, in essentially a nonnegotiable, 'take-it-or-leave-it' environment." 128 Wn.2d at 35.

Even if the insured could negotiate the terms of the policy, only a miniscule fraction of the purchasing public would understand the real significance of the provisions on which State Farm relies, even if those provisions are interpreted in accordance with State Farm's brief. This Court should hold that an insurer who seeks the equitable remedy of subrogation can only recover an equitable share, regardless of the provisions of the policy. The Court should affirm the trial court's order requiring State Farm to share in the expense of obtaining the recovery for this reason alone.

State Farm's policy recognizes that State Farm may sometimes recover its subrogated interest directly from the tortfeasor:

Why does State Farm reserve for itself the right to recover its own cost of collection? The answer is that the insurer might actually recover more than its own subrogated interest, and would then owe the insured the balance of the recovery. For example, the insurer might recover a deductible already paid by the insured. WAC 284-30-390(4) requires the insurer to include a claim for the deductible in a subrogation action if the insured requests it, and allows the insurer to deduct from the deductible a pro rata share of the expenses of the action. Or the insurer might agree to include in the subrogation action the unsubrogated portion of the insured's losses. E.g., Herbert Rosenthal Jewelry Corp. v. St. Paul Fire and Marine Insurance Co., 21 A.D.2d 160, 249 N.Y.S.2d 208, 211 n.2 (1964), aff'd 17 N.Y.2D 857, 218 N.E.2D 327, 271 N.Y.S.2D 287 (1966).

In other words, State Farm's policy language, and the applicable WAC, would permit State Farm to charge against its insured a pro rata share of the expenses of a subrogation action brought by State Farm against the underlying tortfeasor. It would be grossly inequitable to permit State Farm to deny its own corresponding equitable obligation to pay a pro rata share of the cost of pursuing an action brought by its own insured.

This section demonstrates that State Farm could not have pursued its subrogation interest while Mahler was pursuing her own non-subrogated interest. The next section shows that State Farm cannot seek to recover from the tortfeasor after Mahler recovered from the tortfeasor. Thus, State Farm's interest was not recovered and is not recoverable under any inter-company arbitration and State Farm must pay a fair share of the attorney fees incurred by the Mahlers to recover State Farm's subrogated interest.

When an insurer/subrogee pays only part of the insured's damages, both the insured and the insurer have an interest in the cause of action against the underlying tortfeasor. The insurer cannot directly pursue recovery of its subrogated interest while the insured's action is pending.

State Farm built this principle right into the policy it issued to Mahler: "Our right to recover our payments applies only after the insured has been fully compensated for the bodily injury, property damage or loss." CP 281 (emphasis in original). These policy provisions alone make it clear that State Farm could not seek to recover its subrogated interest while Mahler was seeking to recover full compensation from the underlying tortfeasor.

Several sound reasons require the conclusion that the insured controls the cause of action and that the insurer cannot independently attempt to recover its subrogated interest. First, the insured has only one cause of action against the tortfeasor. Krause v. State Farm Mutual Auto Ins. Co., supra; Amica Mut. Ins. Co. v. Maloney, supra; Bowen v. American Family Ins. Group, supra. Any other rule would require the tortfeasor to defend against two separate claims, one for the subrogated part of the damages and one for the non-subrogated part of the damages.

The second reason for this principle is that the insurer/subrogee is not entitled to recover its subrogated interest until the insured/subrogor is fully compensated for his loss. Thiringer, supra, 91 Wn.2d at 219. It is impossible to know whether the insured has been fully compensated until the insured has completely litigated the insured's claim and has collected any settlement or judgment amount. If the insurer/subrogee were allowed to proceed simultaneously, the insurer might recover the subrogated claim before the insured knew whether or not the insured could recover all damages caused by the tortfeasor.

The third reason for the rule is that allowing the insurer to proceed simultaneously with its own action would weaken the insured's claim against the tortfeasor in several ways. (a) Many small claims cannot be economically processed if the subrogated damages are split from the non-subrogated damages. If the insurer could separate the subrogated portion of the claim from its insured's non-subrogated claim, the insured would often have to give up the non-subrogated claim and would be undercompensated. (b) The PIP benefits represent some of the clearest elements of damage in a personal injury action--medical and hospital expenses and loss of income. These clear damage claims increase the insured's settlement leverage in seeking to recover other elements of damage. If the insurer could separately settle these strong damage claims, the insured's negotiating position would be severely undermined and settlement of the insured's action would be much less likely. (c) The tortfeasor and her insurer might refuse to settle with the insured until they could also settle with the insurer, thus delaying the insured's recovery. (d) Simultaneous actions by insured and insurer would present substantial evidentiary problems for the court. PIP insurers often pay less than the actual losses for medical and hospital expense or income loss. In this case, for example, State Farm cut off Ms. Mahler's PIP benefits, CP 403-04, and Ms. Mahler paid for some medical expenses from her own pocket. CP 439. The insured would probably need to tell a jury that she had incurred additional expenses, but that she wasn't trying to recover the additional expenses in her own action. This would almost certainly lead to jury confusion or speculation about insurance, in violation of the long-standing and salutary rule that insurance issues should be kept from the jury. E.g., Rich v. Campbell, 164 Wash. 393, 397-99, 2 P.2d 886 (1931); Carle v. Earth Stove, Inc., 35 Wn. App. 904, 906, 670 P.2d 1086 (1983).

The insured's claim against the tortfeasor is like a pitcher of milk, and the subrogated PIP benefits are the cream. The insurer wants to pour the cream off the top and leave the milk for the insured. But this isn't possible, because the insured must be able to collect the milk before the insurer can have the cream.

Insurers must offer PIP coverage as part of an automobile liability policy. RCW 48.22.085. The value of the statutorily mandated coverage would be substantially impaired if the insured were forced to cripple or weaken her claim against the tortfeasor in order to realize the benefits of the insurance.

State Farm's own policy incorporates the basic equitable principle that the insured has the right to control the prosecution of the subrogated claim after State Farm pays benefits:

Reading these provisions as a whole, State Farm's policy calls for different treatment for different types of coverages: (a) no subrogation or recovery for medical payments (presumably under coverage "C", CP 279); (b) subrogation "to the extent of our payments" for PIP and UIM coverage; (c) ownership of any right of recovery for any other coverages "passes" to State Farm, apparently giving State Farm complete ownership and control of the claim. The clear meaning of the policy as a whole is that ownership of the subrogated claim for PIP payments does not "pass" to State Farm, but remains in the insured. Indeed, the insured holds the rights "in trust" and agrees to "take legal action" to recover the rights. Clearly, it is the insured who owns the subrogated claim and who must prosecute the claim, not State Farm. Otherwise, the requirement to keep the rights "in trust" would be meaningless. Thus, State Farm's own policy language incorporates the normal rule that the insurer/subrogee does not own the subrogated portion of the insured's claim, but that the insured/subrogor owns both the subrogated and unsubrogated portions of the claim, and that State Farm cannot proceed with its own action against the underlying tortfeasor while the insured is bringing an action.

We have shown that an insurer/subrogee cannot recover its subrogated claim so long as the insured/subrogor is pursuing recovery from the underlying tortfeasor. We now show that the insurer cannot recover its subrogated claim from the underlying tortfeasor after the insured has collected the entire claim from the tortfeasor. The insurer can only recover its subrogated interest from its insured and must share in the insured's expenses in pursuing recovery from the tortfeasor.

After the insured has recovered from the underlying tortfeasor, can the insurer then step in and pursue its subrogated interest from the tortfeasor or his insurer? It depends. If the insured collected both the subrogated portion of the claim and the non-subrogated portion of the claim, then there is nothing left for the insurer to collect from the tortfeasor, and the insurer must collect its subrogation interest from its own insured. Metropolitan Life Ins. Co. v. Ritz, 70 Wn.2d 317, 422 P.2d 780 (1967). But if the insured did not collect the subrogated portion of the claim, and the third-party tortfeasor and his insurer were aware of the subrogation rights, then the insurer can pursue recovery of its own subrogated interest. Leader National Ins. v. Torres, 113 Wn.2d 366, 779 P.2d 722 (1989).

In Metropolitan, the insurer paid to the insureds $1,865.39 for medical expenses incurred in an automobile accident. The policy provided that the insurer was subrogated to the payment, and the insured signed an agreement to reimburse the insurer for the payments. The insured then settled with the underlying tortfeasor for $7000 and signed a general release of "all claims." The insurer sued its insured to recover its subrogated interest and the insured argued that the settlement had not included payment for the medical expenses. But the trial court found that the insured had in fact negotiated the right to collect medical expenses from the tortfeasor and the Supreme Court approved of this finding of fact. 70 Wn.2d at 321. The Court also noted that the insurer had offered to share proportionately in the expense of the action against the underlying tortfeasor, and held that it was equitable for the insurer to do so. 70 Wn.2d at 322. The lesson of Metropolitan is that a general release of all claims will effectively release the tortfeasor where the insured has collected both the subrogated and non-subrogated portions of the claim.

This Court reached a different result under equitable principles in Leader National because it was clear that the insured had not collected the subrogated portion of the claim and it was equitable to allow the insured to pursue recovery from the underlying tortfeasor. The insured, Maier, incurred medical expenses of $15,211, received the PIP limit of $10,000 from his insurer, Leader, and then sued Torres, the underlying tortfeasor for the unsubrogated parts of the claim:

113 Wn.2d at 368. The insured then settled with the tortfeasor for $10,000 over the insurer's objection and released all claims against the tortfeasor. Under these facts it was clear that the insured had not collected the subrogated claim, because his damages were $15,211 plus general damages, the trial court had expressly denied the insurer's motion to amend the claim to include the subrogated claim, and the insured had settled with the tortfeasor for only $10,000.

The insurer then sued the underlying tortfeasor to recover its subrogated interest, eventually leading to the Leader National decision. This Court focused on the equitable principles of subrogation:

113 Wn.2d at 369, citing Thiringer, 91 Wn.2d at 220. The Court proceeded to balance the equities between the tortfeasor and the insured, and concluded that both were equally at fault for not protecting the insurer's subrogation interest. 113 Wn.2d at 371-72. The Court concluded that as between the tortfeasor and the insured, the tortfeasor must pay the insured's subrogation interest in order to fully compensate the insured for his damages: "Where the equities are evenly balanced, the principle that persons suffering compensable injury are entitled to be made whole without duplicating their recovery becomes determinative." 113 Wn.2d 372, citing Thiringer.

Applying the analysis of Leader National to this case, it is clear that State Farm cannot pursue recovery of its subrogated interest from American States, the tortfeasor's insurer. Mahler has been fully compensated by the Szucs settlement for her damages, and she has segregated in a trust account State Farm's subrogated interest, ready to pay State Farm. Two inequitable results would follow if State Farm were allowed to pursue the underlying tortfeasor: the tortfeasor would have to pay the subrogated interest twice, once to Mahler and a second time to State Farm; Mahler would be twice compensated for the subrogated interest, once by State Farm and once by the underlying tortfeasor. Under these facts, the balance of equities in Leader National shifts to requiring State Farm to seek reimbursement of its subrogation interest from its insured, Mahler, and not from the underlying tortfeasor or his insurer.

State Farm misreads Metropolitan Life and Leader National as allowing the insurer to choose whether to sue the insured or the underlying tortfeasor. BA 23. State Farm ignores the fundamental equitable nature of subrogation and the equitable principles that led to the decision in Leader National. At least five times, the Leader National opinion refers to the equitable principle that a party suffering compensable injury is entitled to be made whole but should not be allowed to duplicate his recovery. 113 Wn.2d at 369, 370-71, 372 (twice), 373. The Court clearly balanced the equities between the insured and the tortfeasor and found under the facts of that case that the balance favored the insured. By contrast, in the case at bar Mahler collected her PIP benefits from State Farm and again from the tortfeasor. The equities in this case strongly weigh in favor of allowing State Farm to seek its subrogated recovery from Mahler, but not from the tortfeasor, who has already paid the subrogated claim to Mahler.

State Farm argues incorrectly that "it is irrelevant whether plaintiffs were fully compensated" because State Farm seeks to collect from the underlying tortfeasor and not from its insured, wrenching from its context the statement in Leader National that "inquiry need not be made into whether the injured insured was fully compensated by the settlement." 113 Wn.2d at 372. BA 24. State Farm ignores the fact that the Court repeatedly considered the principle of full compensation in deciding whether the insurer should be permitted to bring an action against its own insured or against the underlying tortfeasor. Only after deciding that the equities favored allowing the insurer to sue the tortfeasor did the Court state that full compensation for the insured would be irrelevant in that action "if a subsequent trial is conducted . . ." 113 Wn.2d at 372. In other words, full compensation is a key principle in deciding whether to allow the insured to sue the underlying tortfeasor, but once that decision is made, full compensation is no longer relevant.

Judicial economy requires that claims be litigated once and only once. That is why we have principles of res judicata and collateral estoppel and why we do not allow parties to split claims. State Farm seems to assume that its inter-company arbitration procedure does not implicate concerns of judicial economy, but that is clearly wrong. This case illustrates that the courts are dragged into disputes over the effect of arbitration. Moreover, the courts are frequently called on to confirm arbitration awards. The bar of res judicata renders these ancillary proceedings completely unnecessary.

Whether or not the courts are implicated, State Farm's after-the-fact private arbitration program obviously costs money to administer, an expense which is totally unnecessary after a settlement or trial of the underlying dispute. State Farm's policy holders eventually pay this cost through increased premiums. State Farm claims that its arbitration procedure saves the cost of attorney fees, but only at the cost of severely handicapping the non-subrogated claims of its injured insureds against underlying tortfeasors, as discussed above. State Farm really seeks to benefit its uninjured policy holders by impairing the rights of injured policy holders. This is exactly the opposite of the goal of insurance, which is to collect premiums from all policy holders and use those premiums to benefit injured policy holders.

State Farm's after-the-fact private arbitration can also become unduly burdensome to the insured, who has already undergone the stress and strain of a trial or a settlement. The insured is obligated under the policy to assist State Farm and to take legal action to recover the subrogated interest. CP 281. State Farm has the right under its private arbitration agreement to call witnesses, CP 116, doubtless including the parties to the accident. Thus, the insured, who has already settled or tried the case, could be subjected to yet another hearing for the convenience of State Farm.

It would also violate public policy to elevate the decision of a private arbitration over a jury verdict or even a contested settlement agreement. The arbitration is conducted by one arbitrator, or three if requested by the parties, CP 112, all of whom are full-time salaried representatives of signatory companies, CP 119, and none of whom need be a lawyer. The process is "informal", and is apparently designed to permit decisions based solely on documentary evidence. CP 115-16. Compare the quality of this proceeding with a jury trial, in which the parties are usually represented by counsel, presided over by an elected judge, evidence conforms to long-standing rules designed to exclude unreliable information, the case is decided by twelve impartial citizens sworn to decide the case fairly based on the evidence and in accordance with the law, and the verdict is subject to the protections of appellate review. Our society highly prizes and protects the right to trial by jury, and jury verdicts are nigh inviolate. Parties can certainly agree to the less formal procedures of a private arbitration, but not after a jury verict. It would violate public policy to allow parties to agree to ignore the substantial investment of public resources and the sanctity of a jury verdict and to re-litigate the identical issue in the informal setting of State Farm's private arbitration.

Since it would violate public policy to ignore a jury verdict, it would equally violate public policy to ignore a settlement reached between the insured and the underlying tortfeasor. Settlements are highly favored. Many settlements, like the one in this case, are hammered out between opposing counsel vigorously representing their clients' interests, following some discovery, with an eye to the likely result of a trial, and are often, as in this case, mediated by an experienced lawyer. This is a superior process to State Farm's arbitration process, in which one or more insurance industry employees review a few files and render who-knows-how-many decisions in the course of an "informal" afternoon. Moreover, since the arbitration process cannot override the sanctity of a jury verdict, it should not override a settlement agreement, else parties would be deterred from settling and would be encouraged to proceed to trial.

State Farm incorrectly argues that public policy supports inter-company arbitration in this case, relying on the favorable treatment of arbitration by the courts. BA 35-39. State Farm overlooks the reason why arbitration is generally favored--arbitration is viewed "as a substitute for court trials . . ." Dunlap v. Wild, 22 Wn. App. 583, 586-87, 591 P.2d 834 (1979). Arbitration is favored because it "eases court congestion, [and] provides an expeditious method of resolving disputes . . ." Munsey v. Walla Walla College, 80 Wn. App. 92, 95, 906 P.2d 988 (1995). Arbitration is favored only so long as it provides a speedy and inexpensive remedy that does not contravene any other public policy:

Martin v. Vansant, 99 Wash. 106, 108-09, 168 P. 990 (1917). But none of these reasons supports the use of arbitration as an after-the-fact add-on after a court trial or a settlement.

State Farm argues that inter-company arbitration removes "thousands of small claims from the court system", that it is less costly and time consuming than litigation, and that it relieves the insured from participating in the litigation of subrogation claims. BA 36. This is true only in those claims (probably the majority of claims) in which the insured never pursues a claim against the underlying tortfeasor. We have no dispute with the desirability of inter-company arbitration in such cases. But in a case like this, in which the insured has already brought a claim against the tortfeasor and settled or tried the claim, arbitration saves nothing, is neither speedy nor expeditious, and imposes another burden on the insured.

State Farm argues incorrectly that it is permitted to split Mahler's claim because "American States agreed to it" when American States signed the inter-company arbitration agreement. BA 38. State Farm is confused. Mahler did not have any claim against American States, but only against American States' insured, Dr. Szucs. Unlike some states, Washington has no direct action statute authorizing Mahler to sue American States. State Farm is subrogated to Mahler's claim against Dr. Szucs. The subrogation did not create any new cause of action or new claim. "The insurer, the 'subrogee', has rights equal to, but no greater than, those of the injured party." Touchet Valley, supra, 119 Wn.2d at 341. Dr. Szucs never signed any arbitration agreement and never agreed to waive any defense against splitting claims. American States recognized this fact and asserted as a defense in the arbitration the fact that its insured had already settled with Mahler. CP 427.

For all these reasons, the Court should hold that it would violate public policy to permit State Farm to proceed through an after-the-fact private arbitration after Mahler settled the underlying claim against the tortfeasor for all damages, including State Farm's subrogated interest.

Since State Farm cannot recoup its subrogated interest from the underlying tortfeasor or the tortfeasor's insurer, its sole recourse is to collect its subrogated interest from its insured, Mahler. Under the equitable principles discussed earlier in this brief, Mahler holds the subrogated interest as a trustee for State Farm. Under these same principles, and under the express language of State Farm's own policy, it is obligated to share proportionately in the fees and expenses incurred by Mahler in pursuing the subrogated recovery.

State Farm promised in its policy that it would share in the legal expenses if it shared in the recovery: "If the insured recovers from the party at fault and we share in the recovery, we will pay our share of the legal expenses." CP 281. Mahler recovered from the party at fault. Mahler has consistently protected State Farm's subrogated interest, and the money is sitting in Bailey's trust account waiting to be disbursed to State Farm. The only possible conclusion is that State Farm will share in the recovery and must share in the expenses of recovery.

State Farm seeks to evade its obligation to share in legal expenses under the exception that, "This does not apply to any amounts recovered or recoverable by us from any other insurer under any inter-insurer arbitration agreement." BA 29-33. This argument fails for the reasons discussed above--after Mahler collected State Farm's subrogated interest from Szucs' insurer, State Farm's interest was no longer "recovered or recoverable" by State Farm from "any other insurer."

The Court of Appeals has engrafted onto these subrogation claims the issue whether the attorney's services were reasonably necessary and actually benefitted the insurer/subrogee. Desmond, supra; Richter, supra; Pena, supra. The Court of Appeals seems to mean by this that the trial court must determine whether the tortfeasor's insurer would have paid the insurer's subrogated interest without a contested proceeding in which the insured was represented by an attorney. As discussed below, the Court should abandon this inquiry, but in any event, Bailey's services were reasonably necessary under the facts of this case.

Szucs' insurer vigorously contested Mahler's claim through the capable services of veteran defense counsel Jerry Thonn of the Helsell law firm. CP 9. Szucs denied liability in his answer CP 7, in the mediation, CP 20 and in the settlement documents. CP 586. Despite this vigorous defense, Bailey succeeded in settling all claims for $24,245. CP 9.

This evidence clearly demonstrates that Bailey's services were necessary. State Farm never presented any evidence to the contrary. The trial court was clearly correct in granting summary judgment in Mahler's favor. CP 502.

State Farm's only argument, at trial and on appeal, was that it could have recovered its subrogated interest through arbitration, without the services of an attorney. This argument is misdirected for several reasons. First, as discussed above, State Farm could not proceed against Szucs independently, either during or after Mahler's action. Second, the issue is not whether American States might have been willing to pay State Farm's subrogated interest without the services of an attorney. Mahler had only one claim against Szucs and was required to litigate it all at one time. State Farm was not entitled to recover any part of its subrogated interest until Mahler had recovered all of her damages. Thus, the issue is whether American States was willing to pay $24,250 to Mahler without Bailey's services. The answer is obvious--it was unwilling to pay this much until after Bailey filed this action, proceeded with discovery, and mediated. Bailey's services were clearly "reasonably necessary."

The Court should abandon the "reasonably necessary" test because the test erroneously assumes that State Farm could independently pursue its subrogation claim during or after Mahler's action against Szucs. Pena, supra, 23 Wn.App. at 282; Richter, supra, 29 Wn.App. at 511; Desmond, supra, 63 Wn.App. at 86. Fisher, supra, 78 Wn.App. at 908-09. But for all the reasons discussed above, the insurer cannot proceed against the underlying tortfeasor after the insured has recovered both the subrogated and non-subrogated portions of the claim. Thus, the services of the insured's attorney will always be necessary to permit the insurer to recover its subrogated interest.

The Pena court adopted the "reasonably necessary" test in reliance on a two-page opinion from Oregon. Ridenour v. Nationwide Mut. Ins. Co., 273 Or. 514, 516, 541 P.2d 1377, 1378 (1975). 23 Wn.App. at 281. But the test is inconsistent with the overwhelming majority of cases from other jurisdictions holding under the common fund doctrine that the insurer must share in the expenses and fees incurred in recovering the subrogated interest from the tortfeasor, and few if any of the majority cases have used or adopted the "reasonably necessary" test. Instead, the majority of cases hold, as discussed above, that the insurer has the right to retain counsel to assist in prosecuting the insured's claim against the tortfeasor. This appears to be a preferable rule, provided that any counsel retained by the insurer fairly shares the burden of prosecuting the entire claim, not just the subrogated portion of the claim. See Amica Mutual Ins. Co., supra, 903 P.2d at 840 ("in order for the insurer to claim active participation in a settlement, it must demonstrate that it participated in the settlement negotiations with the insured for the entire settlement and substantially contributed to that total settlement award."); Blue Cross and Blue Shield of Alabama v. Freeman, 447 So.2d 757, 760 (Ala.Civ.App. 1984)("It is the opinion of this court that the mere appearance or intervention in the case by counsel for Blue Cross solely for the purpose of reducing its claim for subrogation to a judgment or lien against the recovery of the plaintiff-insureds, does not satisfy the requirement of active participation or assistance in the prosecution in the case.")

It is a great waste of resources to conduct ancillary litigation over the extent to which the insured's attorney fees were reasonable and necessary. This is a case in point. After this relatively modest claim for damages was settled, the attorney fee issue engendered a number of motions, a mandatory arbitration under the MAR's, a request for a trial de novo, a summary judgment, and now this appeal.

Finally, if the insurer could pursue its own claim after the insured has recovered from the tortfeasor, the efforts of the insured's attorney would almost invariably benefit the insurer. As in this case, the insured's attorney has prepared the issues of liability and damages and has either persuaded the tortfeasor to settle or has prevailed at trial. The tortfeasor's perception of liability and damages is invariably shaped by the efforts of the insured's attorney, usually causing the tortfeasor to settle.

State Farm agreed in its policy that it would pay a share of the legal expenses "if the insured recovers from the party at fault and we share in the recovery . . ." Even if State Farm still has a claim against the tortfeasor and his insurer, Mahler agreed as part of the settlement with the tortfeasor to "indemnify and save harmless" the tortfeasor and his insurer. CP 586. Thus, to the extent that State Farm pursues any claim against the tortfeasor and his insurer, Mahler will have to pay the claim and State Farm will "share in the recovery" within the meaning of State Farm's policy. Accordingly, whether or not State Farm's subrogated claim is recoverable, State Farm must pay its proportionate share of the expenses of pursuing the recovery against the tortfeasor.

Mahler's attorney Bill Bailey charged a reasonable fee for collecting both the subrogated and non-subrogated portions of Mahler's claims. RPC 1.5(c) expressly condones contingent fees, and a one-third contingent fee is standard for automobile accident cases.

State Farm incorrectly argues that Bailey improperly collected a fee for the subrogated medical expenses because State Farm "voluntarily paid these expenses, without any assistance by plaintiffs' lawyer." BA 40. Bailey did not charge his fee for State Farm's payment of PIP expenses; he charged his fee for recouping these expenses from Szucs and took his fee out of the Szucs settlement.

State Farm argues that Bailey could not ethically charge a fee for collecting State Farm's subrogated claim because Bailey "had no business collecting damages for someone other than his client, and then charging his client for doing so." BA 40. That is not what happened. Mahler, not State Farm, owned the claim and pursued the claim against Szucs. Mahler then held the subrogated claim as a trustee for State Farm, but this does not change the facts that this was Mahler's unitary claim, that Bailey collected the claim for Mahler, and that Mahler owed a fee to Bailey for collecting the claim.

State Farm is really arguing that it is unfair to require the insured to pay the attorney fees associated with collecting the insurer's subrogated claim. We heartily agree. But State Farm proposes an less fair "solution": deprive the insured's attorney, who worked hard to collect both the subrogated interest and the unsubrogated interest, of any fee at all on the subrogated interest! To the contrary, the only equitable solution is the one adopted by the overwhelming majority of jurisdictions--require the insurer to pay a proportionate share of the attorney fees incurred in pursuing the entire recovery.

The trial court correctly awarded attorney fees under Olympic S.S. Co., supra. An award of fees is appropriate "in any legal action where the insurer compels the insured to assume the burden of legal action, to obtain the full benefit of his insurance contract . . . ." Estate of Jordan v. Hartford Co., 120 Wn.2d 490, 508, 844 P.2d 403 (1993). On the other hand, an award of fees is not appropriate when the only dispute is over the amount of the claim, not over the obligation to pay a particular coverage. Dayton v. Farmers Insurance Group, 124 Wn.2d 277, 280, 876 P.2d 896 (1994).

The Court of Appeals has explained the difference between disputing coverage and disputing the value of a claim in the context of UIM coverage:

Applying this test to this case, State Farm denied its obligation to share in the expense of Mahler's action against Szucs. Because it denied its obligation to share in the expense, State Farm must pay the expense of forcing State Farm to share in the expense. On the other hand, State Farm would not be liable for attorney fees if it had admitted its obligation to pay and only disputed the reasonableness of Bailey's fees.

State Farm argues that Mahler failed to comply with policy provisions when she settled with Szucs. BA 46. This argument is misdirected because the policy clearly contemplates that Mahler has the right to seek recovery from the tortfeasor, with or without State Farm's consent. CP 281.

State Farm challenges the amount of the fee award, arguing that it is excessive in view of the size of the claim. BA 47. It is disingenuous and hypocritical for State Farm to claim that this is "a $1600 case." BA 3, 47. State Farm told this Court in its Statement of Grounds for Direct Review that this case involves a fundamental issue of broad public importance, that the issues in this case arise in "thousands upon thousands of PIP subro disputes", and that the effect of the trial court's decision will be to deliver thousands of disputes into superior court. Statement of Grounds pp. 8-10. State Farm told this Court in its brief that this case is important not only to State Farm, but also to injured plaintiffs and their attorneys. BA 3. It is obvious to all that this case has considerable importance to all injured plaintiffs, the insurance industry, and the plaintiffs' bar. That is why State Farm has hired one of the finest appellate advocates in this State and has poured thousands of dollars into this dispute. Judge Eadie was well within his discretion in awarding these fees. Allard v. First Interstate Bank, 112 Wn.2d 145, 768 P.2d 998, 773 P.2d 420 (1989).

State Farm criticizes the trial court for awarding the fee of an attorney who reviewed the records and files and filed an affidavit supporting the reasonableness of the attorney fee request. BA 47. State Farm can hardly object to this expense, since Mahler filed the attorney's affidavit to rebut the argument in State Farm's own brief that Mahler's attorneys should recover less fees than they were claiming. CP 620, 645.

State Farm claims that the trial court did not enter findings sufficient to permit review of the fee award. BA 47-48. The basis for the court's computation of fees is clear from the court's order:

CP 671. These amounts exactly match LePley's claim for 32.9 hours at $200 per hour, CP 560, Kilpatrick's claim for 48.35 hours at $295 per hour, CP 555, and would exactly match Bailey's claim for 164.8 hours at $200 per hour, CP 513, but for an apparent typographical error (claim of $32,960 versus award of $32,360). Given the substantial affidavits in support of the fee award, CP 503-16, 549-63, and 640-47, the order amply substantiates the fee award.

The trial court also relied on MAR 7.3 in awarding fees to Mahler, since she had successfully defended State Farm's request for a trial de novo from a mandatory arbitration proceeding. CP 672. State Farm conceded at trial that Mahler was entitled to attorney fees under MAR 7.3. CP 614. Thus, substantial fees were appropriately awarded by the trial court regardless of the application of Olympic Steamship.

Leaving no stone unturned, State Farm even appeals from the award of pre-judgment interest of $216.63. BA 48-49. This is the interest on $1612--State Farm's proportionate share of the fees and costs incurred in obtaining State Farm's subrogated share of the recovery under the terms of its policy, CP 671--from ten days after Mahler received the settlement draft until the date of judgment. CP 525-27. Because of State Farm's intransigent refusal to pay its fair share of attorney fees, the funds were segregated and withheld from Mahler. State Farm should pay interest on the funds. See CP 525-27.

State Farm erroneously argues that the sum was unliquidated. BA 49. The trial court computed the sum from the formula in State Farm's policy, finding that "the figures for that formula are not in dispute . . ." CP 671.

Mahler is entitled to an award of fees on appeal, just as at trial. State Farm v. Johnson, 72 Wn. App. 580, 871 P.2d 1066, review denied 124 Wn.2d 1018 (1994).

The Court should reject State Farm's effort to evade its equitable duty to pay a proportionate share of the fees incurred in recovering State Farm's subrogated interest under the guise of an unnecessary and incomplete insurance industry arbitration forum. State Farm never produced a shred of evidence that Szucs's insurer would have willingly paid Mrs. Mahler for all of her injuries without the forceful advocacy of attorney Bailey on Mahler's behalf. Mahler has consistently protected State Farm's subrogated interest and wants only to pay it over to State Farm, subject to State Farm's bearing a fair share of the attorney fees incurred in obtaining the settlement. The Court should affirm the summary judgment and award attorney fees to Mahler for the cost of defending this appeal.

	____________________________ Charles K. Wiggins WSBA # 6948 241 Madison Ave. North Bainbridge Is, WA 98110 (206) 780-5033

Richard B. Kilpatrick 9 Lake Bellevue Drive, Suite 210 Bellevue, WA 98005-2491	Patrick LePley 4122 128th Ave. SE, Suite 301 Bellevue, WA 98006